Earnings Call: Q3 2020

Oct 28, 2020

Good morning, ladies and gentlemen. Welcome to the Masco Third Quarter 2020 Earnings Call. My name is Maria, and I will be your operator for today's call. As a reminder, today's conference call is being recorded for replay purposes. I will now turn the call over to David Shaika, Vice President, Treasurer and Investor Relations. You may begin. Thank you, Maria, and good morning. Welcome to Masco Corporation's 2023rd quarter conference call. With me today are Keith Allman, President and CEO of Masco and John Snaweiss, Masco's Vice President and Chief Financial Officer. Our 3rd quarter earnings release and the presentation slides that we will refer to today are available on our website under Investor Relations. Following our remarks, we will open the call for analyst questions. Please limit yourself to one question with one follow-up. If we can't take your question now, please call me directly at 313-792-5500. Our statements today will include our views about our future performance, which constitute forward looking statements. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward looking statements. We describe these risks and uncertainties in our risk factors and other disclosures in our Form 10 ks and our Form 10 Q that we filed with the Securities and Exchange Commission. Our statements will also include non GAAP financial metrics. Our references to operating profit and earnings per share will be as adjusted unless otherwise noted. We reconcile these adjusted metrics to GAAP in our earnings release and presentation slides, which are available on our website under Investor Relations. With that, I'll now turn the call over to Keith. Thank you, Dave. Good morning, everyone, and thank you for joining us today. I hope you and your families are staying healthy and safe in these difficult times. Please turn to Slide 4. During the Q3, demand for our products was extremely strong as consumers continued to reevaluate how they use their homes in the face of ever changing responses to the pandemic. With more time at home and more disposable income due to reduced discretionary spending on leisure travel, entertainment and gas for commuting to name a few, consumers are investing in their homes. I'm very proud of our strong execution as we met this increased demand and served our customers while maintaining our top priority of employee safety. This resulted in tremendous performance on both our top and bottom lines. Sales for the quarter increased 15%, excluding the impact of currency. Operating profit increased $127,000,000 or 43% and operating margins expanded 400 basis points to 21.4%. We delivered strong incremental margins of 48% as a result of our ability to profitably leverage the robust volume growth and to pull the right cost reduction levers. Earnings per share grew 73% to $1.04 per share. Turning to our segments, excluding currency, Plumbing sales increased 12%. North American plumbing sales grew 14% led by extremely strong performance at Delta, which drove greater than 20% growth across each of its retail, e commerce and trade channels. Trade sales in North America were particularly strong in the second half of the quarter, with Delta achieving record trade sales in both August September. Delta was recently recognized as the Home Depot Marketing Partner of the Year. This is an annual award across all of Home Depot's suppliers and speaks to partner with our customers to drive growth through innovation, omnichannel expertise and strategic thought partnership. Our spa business also rebounded nicely in the 3rd quarter and achieved growth despite still dealing with government limitations on the number of employees in its factories. Record levels of demand and backlog for our spas continued as consumers look for ways to enhance their at home living and backyard experience. Our international plumbing business also While Europe as a whole rebounded in the Q3, certain markets remain challenged such as the U. K. And Spain. In our Decorative Architectural segment, sales grew an exceptional 19% as we drove growth in all product categories, including paint, bath and cabinet hardware and lighting. Our DIY paint sales remained very strong in the quarter with growth in the upper 20% range. Propane declined mid single digits, a significant improvement from last quarter. Paint demand has remained robust as it is a simple, economical project that homeowners can do themselves to improve the appearance of their home. Across all of our business units, it was an exceptional quarter. I would like to again thank all of our employees for their tremendous efforts in serving our customers and keeping each other safe. Now moving into our 4th quarter outlook, we anticipate demand to remain strong and expect 4th quarter sales growth excluding currency to be approximately 8% to 10% in both segments. Additionally, we expect 4th quarter operating margins for our Plumbing segment to be approximately 19% and operating margins for our Decorative segment to be approximately 17%. Together, this would put Masco's operating margin at over 17% for the quarter, a year over year expansion of approximately 150 basis points. As it relates to SG and A as a percent of sales, we anticipate further investment in our brands, innovation and service to ensure we continue to deliver long term sustainable value creation. This outlook assumes no further shutdowns of facilities or points of distribution, which is obviously a concern as COVID cases spike in many parts of the United States and the world. Lastly, I'd like to update you on our capital allocation. While there remains uncertainty in the current environment, based on our strong balance sheet and liquidity, we do plan on resuming our share repurchase program in the Q4. While the amount of repurchases will be subject to many variables, our initial plan is to deploy approximately $100,000,000 towards repurchases in the quarter. And finally, there is no change to our thoughts on M and A. We remain active in the M and A market and have the balance sheet and liquidity to execute transactions with the right strategic fit and return during these uncertain times. With that, I'll now turn it over to John for additional details on our Q3 results. John? Thank you, Keith, and good morning, everyone. As Dave mentioned, most of my comments will focus on adjusted performance, excluding the impact of rationalization and other one time items. Turning to Slide 6, we had an outstanding quarter as sales increased a robust 15% excluding currency. Foreign currency translation favorably impacted our 3rd quarter revenue by approximately $13,000,000 In local currency, North American sales in the 3rd quarter increased 16%. This exceptional performance was mainly driven by strong volume growth in our DIY paint and North American plumbing businesses. In local currency, international sales rebounded nicely from last quarter and increased 9% over prior year, driven by increased volume. Gross margin was 38% in the quarter, up 2 10 basis points, driven by increased volume and cost leverage. Our SG and A as a percent of sales decreased 200 basis points to 16.5% as a result of fixed cost leverage and our continued focus on cost containment. Operating income was $425,000,000 up $127,000,000 or 43% from last year, with operating margins expanding 400 basis points to 21.4%. Our EPS was $1.04 an increase of 73% compared to the Q3 of 2019. Companywide incremental margins for the quarter were a strong 48% due to operating leverage on the exceptional volume, our continued focus on cost control and a relatively benign commodity environment. While this tremendous performance is a testament to Masco's operating leverage and commitment to cost control, we also recognize the need to invest in our brands, service and innovation to fuel our growth and plan to fund such investments in future quarters. While uncertainty remains and precise forecasting is a challenge, we do anticipate continued solid consumer demand in the 4th quarter. We expect sales growth excluding currency of 8% to 10% with approximately 150 basis points of margin expansion from Q4 of 2019. Uncertainties such as the effect of government stimulus programs and the impact of the virus on the overall health of the economy and consumer could impact demand in the market and our expected results. Additionally, it is important to note that our Q4 expectations assume no further closures of our manufacturing plants or points of distribution related to COVID-nineteen. Turning to Slide 7, Plumbing grew 12% excluding the impact of currency. Foreign currency translation favorably impacted this segment sales by approximately $13,000,000 in the quarter. North American sales increased 14% in local currency led by Delta. The strong growth we experienced at the end of the second quarter in our trade, retail and e commerce channels continued in the Q3 driven by robust consumer demand and some inventory restocking. While manufacturing in our spa business improved compared to the 2nd quarter, walk ins continue to operate at less than 100% capacity due to ongoing government mandated employee limitations in our Mexican facilities. Despite these challenges, Watkins grew in the Q3 and they continue to experience very strong demand for their products, resulting in a record backlog. International Plumbing sales increased 9% in local currency. Hansgrohe drove low double digit growth in both Germany and China with lower growth in other European countries. This growth was partially offset by continued declines in other countries, including the UK and Spain, where the economies have been slower to recover. Operating profit was $271,000,000 up $83,000,000 or 44 percent from prior year with margins expanding 510 basis points to 23.8%. The strong incremental margin of 61% was driven by higher volume, cost productivity initiatives and a favorable price cost relationship. Turning to the 4th quarter, we anticipate sales excluding currency to be up 8% to 10% with margins of approximately 19%, up 150 basis points from prior year. Turning to Slide 8, Decorative Architectural grew 19% for the 3rd quarter. This outstanding performance was driven by high teens growth in our paint business with strong high 20% growth in our DIY paint, partially offset by a mid single digit decline in Pro Paint. The continued resurgence in DIY paint and some inventory restocking drove this performance. We remain well positioned with Bayer's compelling quality and value proposition to capitalize on this shift in consumer behavior. While propane demand declined in the 3rd quarter, we saw a nice improvement from Q2 and sequential improvement through the quarter. Our Builders Hardware business also contributed to the segment's results as they delivered exceptional growth across product categories and benefited from strong consumer demand and new program wins. Additionally, our Lighting business continued to improve achieving growth over prior year. Operating profit increased in the quarter by 34%, driven by incremental volume and continued cost control, partially offset by an unfavorable price cost relationship. Turning to the Q4, we expect a strong demand for paint to continue and anticipate segment sales growth of 8% to 10% with operating margins of approximately 17%, up approximately 70 basis points from prior year. At the same time, we anticipate a price cost headwind in a more normalized level of investment in the 4th quarter. And turning to Slide 9. We continue to strengthen our balance sheet with net debt to EBITDA at 1.1x as we ended the quarter. Approximately $2,300,000,000 of balance sheet liquidity, which includes full availability of our $1,000,000,000 revolver. Working capital as a percent of sales improved 70 basis points versus prior year to 16.4% through lower inventory levels and an improvement in accounts payable, largely resulting from working capital improvements at Kichler. It is important to note that our GAAP reported net cash from operations of $573,000,000 to the 9 months ended September 30 reflects the cash taxes paid on the sale of our Cabinetry business. Excluding the impact of approximately $192,000,000 of cash taxes paid on the gain on the sale of our Cabinetry business, our year to date adjusted net cash from operations is approximately $765,000,000 with free cash flow of approximately $690,000,000 This is consistent with our expectation of 100% free cash flow conversion this year. A reconciliation can be found in the appendix of this deck. During the Q3, we also successfully refinanced our 2021 debt maturity at historically low rates, which will result in approximately $4,000,000 of annualized interest expense savings. Lastly, as Keith mentioned, we plan to reinstate our share buyback activity in the 4th quarter. We currently intend to deploy approximately $100,000,000 to share repurchases in the Q4 subject to market conditions. And with that, I'll now turn the call back over to Keith. Thank you, John. The COVID-nineteen pandemic continues to impact our business as consumers reevaluate their living environments. The house is no longer just a place for shelter. It has become the office, the restaurant, the classroom, the gym and the entertainment center. And we are capitalizing on these changing needs with our leading products by providing an affordable way for homeowners to discover better living possibilities and to enhance how they interact with their homes. At our Investor Day, a little more than a year ago, we committed to between $2.80 $3 earnings per share in 2021. I'm very proud of the entire Masco Co team and pleased to say that we will achieve and likely exceed this range a full year earlier than planned. And while it is a bit early to provide a definitive outlook for 2021, we believe that the strong consumer trend of increased investment in their homes will continue in 2021 and support growth for our products. The changes we have made to Masco over the past few years, our culture of execution and our commitment to continue to invest in brand, innovation and service to support our customers positions us well to drive long term growth and value creation in this ever changing market. With that, I'll now open up the call for questions. Maria? Thank you. In order to ensure that everyone has a chance to participate, Our first question comes from the line of Matthew Bouley of Barclays. Good morning. Congrats on the results and thank you for taking the questions. I wanted to start out with a question around the, I guess, longer term margin. Keith, you just mentioned the Investor Day and thinking about how to guide this year is kind of setting up on the margin side to come in above the ranges you had given in both segments. And I also hear you around some intentions around investing for growth. So as we think about 2021, is the idea that you're going to sort of intentionally bring those margins back into the long term range? Or is there a potential that you can kind of remain above those long term ranges for an extended period here? Thank you. Matthew, when you think about our margin targets for 2021 that we set up at the Investor Day, we need to remember that that was based on a significantly lower volume expectations for 2020 to 2021. I think we had plumbing in that 18% to 18.5% range, Deco was 17.5% to 18% and overall Masco just shy of 17%. And as I said, this guidance was based on a low volume outlook. And as we've talked along this call and in other calls, we leverage volume very nicely. So there's lots of variables and we'll continue to invest in our brands, innovation and service like we talked about. And that will certainly be somewhat of a headwind, if you would, to margin expansion. But with strong R and R fundamentals and increased volume, I would think that we would be able to exceed those targets and margins that we talk about at our Investor Day in 2021. Okay, understood. Secondly, maybe 0ing in on the 4Q margin guide in Plumbing. Just given where you kind of ended Q3, implying a bit of a step down sequentially that's larger than typical for Q4. So is there anything in that Q3 Plumbing margin that is, I don't know, I guess unsustainable or one time in nature that might drive that type of step down? Thank you. There's a couple of things that are interacting as we think about Plumbing in the Q4. Recall that once the pandemic hit, we very swiftly enacted significant cost cutting measures as we were in the throes of assessing what exactly the impact was going to be on liquidity, on cash flow, etcetera, and on demand. And we demonstrated, I believe, with our 3rd quarter results that our demand has remained robust. So now as we move into the Q4, we do expect to see some increased production costs. Certainly over time, higher bonuses, higher volume rebates, probably we'll have some additional a little bit of additional freight as we continue to balance out inventories in our supply chain and keep up with strong demand. Commodities will be a little bit less favorable as we look forward. And we do anticipate, as I talked about, bringing back some additional investment spend to make sure that we are going to win in the recovery. We talked about investment in brands and advertising and marketing, continued and increased investment in innovation. So that's the dynamic that we're looking at as we think about margins. Q4 really pretty similar for the other segment as well, but definitely for Plumbing. Okay. Thanks, Keith. Our next question comes from the line of John Lovallo of Bank of America. Hey, guys. Thank you for taking my questions as well. Maybe starting off just with Kichler, just wondering if you can give us an update on how the performance was in the quarter within a very strong segment performance? They did a great job, really impressed with the team down there, continue to execute, I would say, better than planned, at or better than planned. So we achieved growth. That was very solid. And the team is doing a good job. We're on plan. Okay. And then maybe just going back to the Plumbing margin, the 23.8% in the quarter, it sounds like there's going to be some increased investment coming forward, which makes a lot of sense. But how much of that was constrained investment in the quarter? Was that a factor? Or was it just the other factors that you talked about? When you say constrained investments, John, how much did we have a reduction of the divestment in Q2, is that what you're asking? Yes, John, maybe I'll take this one. In terms of yes, I mean, if you think about our performance in the 3rd quarter in Plumbing, yes, as we exited Q2, one of the things that Keith mentioned, we really clamped down on expenses at the start of the pandemic and we kept them constrained as going into the 3rd quarter. And so as you think about typical expenses that we might be running, particularly in the SG and A area, right, a lot less travel and entertainment, right, because firstly, we're not having our teams travel very much. Things like promotional expense were down significantly in the quarter. Things like trade shows that we would typically attend were all down in the quarter. And so that led probably to a little bit better margin expansion on top of the benefits we enjoyed for the operating leverage in Q3. And so as Keith mentioned, as we roll from Q3 into Q4, we're watching we're trying to contain our expenses as best we can, but we have to appropriately reinvest to grow the business. And so we are viewing the fact that we may need to layer some of those costs back in as we go into Q4. Our next question comes from the line of Mike Dahl of RBC Capital Markets. Hi. Thanks for taking my questions, nice results. Keith, John, you mentioned in remarks and in response to one of the questions, some of the input costs potentially creeping up and also freight, I think as we think about global recovery and also potential vaccine distribution next year. There's certainly some thought that we could see further acceleration in some of the freight pressures and also some reacceleration in inputs. I guess, can you give us any more color when you're thinking about that 4Q margin? How much of an impact are you already seeing? And what are your thoughts as we head into 2021 around inputs and freight? Yes, sure, Mike. It's John. In terms of your commodity costs, yes, certainly in Q3, you have some benefit. So all of the drivers of our margin expansion in Q3, I'd say volume and cost productivity were much bigger drivers of our Q3 performance than obviously commodity inputs. Now looking forward, as you think in our plumbing and you think about the base metals, copper and zinc, they did help us and give us provided us a little bit of tailwind in the Q3. But recall that we've seen copper and zinc start to increase, particularly in the Q2. And I think as we've said before on other calls, I think it's about 2 quarters for raw material inflation to flow through, particularly the base, the copper and zinc before it hits our P and L. And so that will be a little bit less of a tailwind, a little bit more of a headwind as we go into Q4. As it relates to the input costs for paint, our price commodity relationship was a bit of a headwind in the quarter. And we expect that to increase a little bit as we go into the Q4 as resin prices have started to rise up a little bit because oil has risen over the course of the year. So that's where we're looking TiO2, I would say, has remained relatively stable, not a lot of up or down movements there. So as we go into the Q4, we expect that to continue to be stable. Part of your question, I think Mike, you also mentioned freight. We haven't seen a lot of freight cost pressure yet. And I would remind everyone that distribution and logistics costs as a percent of sales for us is relatively low. So even though if we saw significant spikes in distribution logistics, that wouldn't be much of an impact. So where we are seeing a little bit of tightness is on just supply of freight in trucks. And so that's something we're keeping an eye on. That said, I think we and our teams have always done a great job of handling inflation, whether it's our general inflation that we experienced or commodity based inflation. And so we'll handle it accordingly. We'll do it like we've always done. We'll continue to drive our cost productivity initiatives. We'll continue to work with our suppliers to push back on them and we'll also net pricing if that's required. Great. Thanks for that. That's really helpful. My second question is clearly a great recovery in Plumbing both in North America and in international. Just wondering, I think with Europe, some of the rising cases have probably been at least a few weeks ahead of what we've seen in the U. S. And there have been some local restrictions that have probably gotten a little bit tighter there. Can you talk about just whether you're seeing any of those impact your European Plumbing business at this point in the Q4 relative to the recovery in Q3? Well, I'll take this one, Mike. Germany, which as you know is Hansgrohe's largest market and China, which is also a very large market for us, each drove low double digit growth in the Q3. So we did see good growth. We also saw growth, but to a lesser extent in other European countries, Italy, the Netherlands, for example. But as I said in my remarks, there were also other countries such as the UK and Spain that have been slower to recover. So when we think about Europe in the Q3, it was good. It was robust for us. As it relates to the Q4, we're watching very closely what happens. And yes, you're right, there has been some tightening. And they're doing it in a little bit different way than we are here. They tend to be more metropolitan area focused, meaning they're being more pinpointed in the types of restrictions that they're employing, whether it's cutting the time in certain cities that restaurants can be open or closing certain types of venues like cinemas, movie theaters, etcetera, on a city by city basis. So they're being more surgical. And I think just like around the world, there's more experience in how to work through this. So it remains to be seen what the ultimate impact will be. But I think what we've demonstrated is that we have the ability to be agile, if you will, and to very closely monitor the situations and pull the cost levers appropriately if needed. So right now, we're really watching, particularly over in Europe. Thanks, Keith. Good luck in the quarter. Thank you. Our next question comes from the line of Adam Baumgartner of Credit Suisse. Hey guys, good morning. Thanks for taking my questions. Can you give us a sense for how much customer restocking added to growth across both businesses? You did mention that in both segments. Yes, Adam, as you might expect is as we exited the second quarter because of the strong demand that we were experiencing at the end of Q2, inventories were relatively low in the channels. And as you think about the growth drivers for the Q3 being volume and inventory restocking. I would tell you that volume was by far the much more significant driver of growth. Inventory restocking was a relatively light impact in the quarter. Okay. Got it. Thanks. And then just looking at 4Q paint or decorative guidance, what are you assuming for DIY and pro growth in that guidance? As we look, we think demand for paint will continue to be strong as we go into the Q4. We indicated we're forecasting 8% to 10% sales growth in Q4. And again, I think we're going to see continued strong demand on the DIY side and muted but more in improving demand on the pro side of our business. So I would remind everyone though, we've got a bit of a tough comp going in pain as we go into the Q4. As you may recall, in our Q4 last year, we experienced about $20,000,000 of sales pulled forward in the Q4 of last year. And so that will be a bit of a comp headwind for us as we go into Q4. Great. Thanks guys. Our next question comes from the line of Susan Maklari of Goldman Sachs. Susan, you may be Susan, are you there? Yes. Operator, we're going to there you go. I'm sorry about that. That was my fault. Sorry. My first question is just talking about, you obviously mentioned you're restarting the share repurchase program, which I think is a good sign of your confidence in the outlook and what you're seeing. Can you talk a little bit about maybe any potential to exceed that $100,000,000 or how we should think about this starting to kind of layer back in and you getting back to the levels that you've seen in the past couple of years? Sure, Susan. As we indicated, both Keith and I indicated in our prepared remarks, we're right now targeting around $100,000,000 per share repurchases in the quarter. I think as we both indicated, there's a lot of variables that go into the decision to drive what drives our share repurchase activity. It's going to be subject to market conditions to the extent that we see a pullback in the shares, we'll be probably a little bit more opportunistic like we were earlier this year when we repurchased $600,000,000 with our shares for less than $40 per share. So to the extent we see greater share pullback, we'll probably be a little bit more aggressive to the extent we see the share price run high. We'll probably continue to devote that $100,000,000 but probably not much more than that. Again, it's going to be a bit of a judgment call as we work our way through the quarter. Okay. All right. That sounds good. And then just following up there, you can you give us a little color on Kichler and perhaps some of the trends that you're seeing there and especially given some of those cost cutting efforts, how we should expect that to start to come through as we look to 2021? Lighting is a relatively less expensive purchase that you can create some pop and a new look in your house. So much like many of our products, which were in that are in that sweet spot of the price point and bang for the buck if you will. We also saw that in lighting. So we saw good growth across our channels and Kichler participated in that growth. As we said, Kichler grew. And as I mentioned before to an earlier question, we're on plan, maybe even a little bit ahead of plan. And I'm pleased with how the team is performing and our objective was to position Kichler for growth next year and we had growth this past quarter. So I like what I'm seeing. Okay, great. Thank you both. Our next First, among the 2 segments, how did could you just go through how demand trended throughout the quarter and how it either ended in September or October even? And just for clarity, the exit rate seems like all of your businesses were positive on a year over year basis in 3Q, but do they are they still trending that way? As we spoke a little bit, Truman, in the prepared remarks, Delta had a record last couple of months of the quarter. So nice acceleration through the quarter and that's fairly consistent with the Plumbing segment in general, had good solid, somewhat consistent growth over in Europe in Plumbing. In the DIY space and excuse me, in Paint and then decorative in general, pretty consistent. It was strong going in and remained strong going through. So that gives you a little bit of color on the in quarter kind of dynamics. Okay. Thank you for that. And then not necessarily in paint or faucets, but in other building product categories, we've heard of some supply chain issues or capacity issues in filling the robust demand. Are you all seeing that in paint and faucets specifically? Or you have any capacity issues? And then on the flip side, it seems like there's a little bit of inventory build in your channels. Do you think that there's more to come that your retailers especially need to build additional inventory? And how are you thinking about your own inventory levels over the winter? Are you looking to build up a little bit more than you normally do? Right now, Truman, we're managing through with our current capacity. Typically, we would use the slower months in the beginning of the year and early Q2 to build inventory. We didn't have that luxury due to restrictions and uncertainty and everything that was going on at that point. Now we do have plans to selectively add some capacity where we need it. We talked a little bit about the resurgence and the increase in demand of 1 gallon filling, 1 gallon paint due to the tremendous shift over to DIY where the DIYers tend to buy more 1 than 5. So we have to had to buy and purchase some additional capacity at 1 gallon filling lines, that sort of thing. So there's some spot capacity in certain types of machinery where we've had to add, but really there's been no significant capacity issues. At some point, we're likely going to increase capacity in certain areas, but not an immediate horizon. In terms of the inventory position in the channels, I would say that inventory is probably a little bit light for where we would like to see it and where our channel partners would like to see it. So may see a little bit of inventory fill as we move through the year. Yes. And Truman, one thing I'd add to Keith's comments is that I would like to take this time to acknowledge our supply chain teams. They have done just a fantastic job of reacting to the increased robust demand that we've been experiencing in the Q3. And whether it's our supply chain teams internally, our folks in our plants across the portfolio or whether it's our suppliers. Everyone has acted coordinated in a coordinated fashion to really drive this growth. And so we're really pleased with how the team has responded this quarter. Thank you all and good luck on the upcoming quarter. Our next question comes from the line of Keith Hughes of Truist. Thank you. Question on Watkins, it sounds like you're still having some production issues. Do you have any sort of feel for when that will get back to full production and alleviate some of the backlog you discussed earlier? Keith, again, Watkins team is working day and night to deliver and fulfill on demand. When the Mexican government releases the restrictions is tough to tell. I mean, we don't have any good insight as to when that's going to take place. But the Watkins team is running hard and fulfilling as best they can. And they like I said in my prepared remarks, they drove growth in the quarter despite some of these restrictions. And so we're really pleased with how the Weidtman team is delivering here in Q3 and Q4. And second question on propane. You had talked about it sounds like in the 4th quarter you expected to get a little bit better than what we saw in the 3rd. Why is that? Is that something to do with your retail partner or is that something more in the market? I think, Keith, it's just continued progress in the trends that we've been seeing. As you might expect in Q2, we saw a lot of pullback on consumers allowing paint contractors to come in their homes and we've seen a steady improvement since Q2 and actually through Q3, we saw sequential improvement each month through the quarter in our propane sales. And so based on what we're experiencing, we think that that trend could continue here as we go into Q4. A lot of variability there, Keith. What happens to the virus and what happens to the consumer psyche as it relates to PROs being allowed in your home. The fact that in the late year it moves more towards interior. So there's a lot of variables that we have to think about. Okay. Thank you. Our next question comes from the line of Michael Rehaut of JPMorgan. Thanks. Good morning, everyone, and congrats on the results. Thank you. First question, I just wanted to circle back a little bit to understanding some of the sequential trends that you're expecting in the businesses on the top line on the sales side in Plumbing and Decorative. And when you think about the expected still very strong growth rates, but a little bit of a decel in Plumbing from roughly 13% to 8% to 9%. Just trying to get a sense of what's driving that if it's if all of that is perhaps the absence of the inventory restocking that you referred to earlier or if there's other things at hand? And similarly, in Decorative, I believe you had said earlier that you observed relatively consistent trends during 3Q. So again, just trying to understand the decel into 4Q. And I know, John, you had referred to somewhat of a tougher comp, but I'm also looking at 3Q 'nineteen growing at 5%, 6% and 4Q 'nineteen down 3%. So just wanted to try and better understand what's driving that as well. Yes, Mike. As you think about the transition of the growth from Q3 to Coupe for that sequential, first of all, we had extremely strong demand in Q3, which drove really good results. We expect and as you said, we expect demand to continue to be good as we go into Q4. But as you know, forecasting in this current environment is a little bit of a challenge. And it's hard to say what impact the virus might have on our Q4 results. And there may be a little bit of a dose of conservatism in that guide as well as we're trying to dial things into the Q3 or the Q4, I should say. So from my perspective, we had 12% growth in Plumbing in the Q3. We're looking at 8% to 10% growth. So I don't view that as significant deceleration as we go into the Q4. That said, 3rd quarter did have some inventory restocking in it. So we're probably thinking there's probably a little less inventory restocking as we go into Q4. We'll see how that plays out. On the decorative architectural side, to the point you made in your question, the pull forward definitely has an impact, we think, on our Q4 revenue growth rates, because we're currently not expecting that type of activity to recur here in the Q4 of 2020. I'd also say that Liberty Hardware, which is a smaller one of the smaller businesses in the segment, had a terrific quarter, full stop. I mean, they had a really, really strong quarter. And as we go and they also had a load in here in the Q3 due to a program win they had at one of their retail customers. And so we don't expect that activity to recur. And similarly to the Plumbing segment, Mike, we talked about a little bit of inventory restocking in Q3. We don't expect that same level of inventory restocking to take place in Q4. So as we pull it all together, the transition or the growth rates from Q3 to Q4 are a little bit more muted in Q4. That said, we think 8% to 10% growth in this environment is still quite strong and with 150 basis points of margin expansion that we think represents a very good quarter. Absolutely. And I appreciate that. Thank you. I guess secondly, on the margin side, obviously, it's great to see the reinvestment in the business. And when you're talking about the margins that you're generating, that strategy makes perfect sense in terms of trying to maintain those high margins and reinvest for the top line. Obviously, that's baked into your 4Q guidance. How should we think about 2021 in this regard? And when Keith, you talked about before perhaps being able to maintain a margin above your long term targets. Is that with reinvestment spend kind of kicking up or how do you see that factor impacting profitability? Is that something where it could be a 50 or 100 bps type of investment or the levels could still stay above those long term targets with a higher reinvestment rate? My Tom, again, it's too early to call 2021 and we'll talk more about that next quarter. We do expect growth in 2021. We think that the fundamentals of the consumer, when you look at what really drives our business that is configured now, it significantly swings on home price appreciation, housing turnover and you look at those numbers, we're looking at let's call it 5% home price appreciation and $6,500,000 of existing home sales. Those are big numbers. Now those aren't sustainable numbers, but that certainly gives us a lot of confidence going into 2021. So my comments about continuing to grow and driving margin expansion, we all that's how we think here. We always want to grow above market and we want to continue to expand margins. So our increased investments were factored into my thinking and my comments that I made there. Now I will say that when you think about the optimum spend for value creation, I'm not going to sit here and say that 16.5% SG and A is the optimum, it's more than that. And we're going to continue to drive long term, mid and long term value creation. So there will be an increase in SG and A. Not sustainable at 16.5 because that's not the right thing to do to drive value creation. So we're going to increase those investments, but we also are very carefully watching these cost reduction levers we have and how much we increase because we don't know, no one knows what's where this virus is going to go over the coming months. But as we learn more, we're going to maintain our commitment to the future. Our next question comes from the line of Stephen Kim of Evercore ISI. Thanks very much guys. Yes, I had two questions for you both kind of related to the virus because you've given a lot of good information in other areas. And obviously, I'm not asking you to predict the future. But if we take it from a negative perspective, I'm curious as to what you think what you're anticipating the effects this time. And you talked about some differences between the U. S. And Europe in the terms of the way that we handled it the first time. How do you imagine the effects may be a little different in particular as it relates to your business? I'm thinking, do you think inventories would hold more stable through a shutdown wave, for instance? And are there other impacts that are important for us to consider for your business if we were to tighten up again? That's a crystal ball kind of question and I wish I had one. The way we think about what could happen, either positive or negative, it kind of turns on a couple of things. One is the discretionary spend. So is the discretionary spend of the consumer going to continue to be at a rather high level now as it relates to reduction in spend in other areas like entertainment and going out, etcetera. And what could potentially happen if there was a reduction or no stimulus if the virus got worse, those sorts of more downside scenarios. So where does the discretionary spend go? Is there more or less discretionary spend? And then the second component is what share of wallet of the consumer is going to be spent on the home? Obviously, we've seen a significant spike in that share of wallet being spent on the home. And will that continue? I don't think it's probably prudent to think that this is going to stay at these elevated levels in perpetuity, probably would revert back to the mean. But at the same time, we do believe that there has been some structural changes to the DIY market. And we talked about last quarter some of our own research, and I've certainly talked to other people in the industry and our channel partners in terms of some of their research. And you simply can't deny that the millennials have entered in and entered in big into DIY. And that is earlier than we expected. We expected it, but it's earlier. So that could be could represent a structural expanding of the DIY pie, if you will. So don't have a crystal ball answer for you, but those are three things that we're thinking about as we evaluate positive and potentially negative scenarios. And Stephen, I guess maybe to add my own color on that. I mean, I think like Keith said, I think consumer demand will be there. I mean, as we saw what happened in the spring as we work through the pandemic, the consumer was there and they were spending and they were investing in their home. And like he said, given the trends that we're seeing and given the research that we've seen, we think consumer demand will be there. The thing that we've got to keep our eye on like because we're still contending with our Watkins operations is what happens to production. And if the shutdown affects any of our facilities. And so that's the one thing we got to keep in the back of our mind as well. Yes. Fair point. Next question relates actually it's kind of a flip scenario. Let's say in sometime in the next foreseeable future, we actually get a vaccine and we get a more rapid reopening or reopening that's more on a more rapid side, let's say, a more positive like bullish outcome. One of the foreseeable things that a lot of folks are talking about now for your business, and of course, you've addressed it before, is that you might see a slowdown in DIY paint because you had a little bit of pull forward maybe. And so in particular, I suppose with DeckArc, I'm curious if you could address what areas you think you might are there areas where you're doing some contingency planning today ahead of a potential slowdown in the event of a vaccine? And what are the operational challenges that you could reasonably foresee? And what would your action plan look like? I'm not asking for a lot of specifics here, but just generally, what are the areas of your business that you're anticipating you may need to pull a lever for? If you could give us some insight into how you're thinking about that. I think it would probably be mainly on discretionary spending. I really wouldn't see significant structural cost reductions. When you think about where our brick and mortar capacity is and how it's lined up, we're in pretty good shape there. We had good utilization going into the pandemic and we have outstanding utilization now. So I think on the upside scenario, we could see a potential investment in some capacity down the road. We obviously work very hard to get more out of the assets that we have, do better with what we have sort of thing in terms of efficiency and how we use our assets. And then the downside, we would flex down on the discretionary. It's kind of how I would see it. Yes, Stephen, maybe the way I would approach it is, we've got a great investment in our pro franchise. And if a vaccine tier, your little description were to come true or come through faster, I think we could double down on our pro investment and grow that business faster than we've been growing it in the last several years. I mean, we've experienced double digit growth in our propane business historically. And if the consumer decides not to paint it paint their homes anymore and they want pros to do it, we'll be right there with our channel partner to meet that demand. So I think that's the way I would position the business going forward, if your scenario were to emerge. Great. Thanks a lot guys. Appreciate it. Our next question comes from the line of Garik Shmois of Loop Capital. Hi, thanks. I just wanted to follow-up on the comment you just made just around capacity. Just with the step up in demand, it sounds like there's a pretty solid outlook into 2021. I mean, how far away are you from having to perhaps add some capacity, whether it's in plumbing or paint? Yes, I'll talk first, maybe Keith can add some color afterwards. So our team has done a great job of driving efficiency within our facilities such that, Garik, we don't need to add any brick and mortar capacity in the near term. We are as Keith mentioned earlier, we are investing a little bit in our 1 gallon capacity in the paint side because where the demand has been the strongest over the course of the last couple of quarters. That said, if demand continues to go at the current pace that it is, I would estimate that we might need to expand some of our facilities probably in the 2022 or 2023 timeframe. It's not going to definitely be a 2021 investment. But that might be the soonest that we think we have to do it. We'll have to see how the demand plays out over the course of the next couple of quarters. Okay. Thanks. And just had a quick question on Plumbing. You called out good growth across the board, retail, e commerce. You sounded particularly bullish just on what you're seeing in trade in August September. So just kind of wondering what is driving the acceleration in the trade channel and what the outlook is there? Thanks and congratulations. Yes. I think consumers were becoming more comfortable and feeling more safe to go into plumbing showrooms and to go into those areas of the trade channel that they really shut down for a while, that literally shut down and then shut down in the sense of not being comfortable going in them. So I think the consumer engaging with that part of the channel as it relates to showrooms was a big plus and we're very strong in the showrooms. So that that fed right into our sweet spot. So I think that that was a big component of it. Also to a degree, the consumer is a little bit more comfortable with having plumbers in their home. And there's a component of faucet or a shower a faucet or a shower system. So I think those are the dynamics that drove the trade. Our next question comes from the line of Tim Wojs of Baird. Hey, guys. Nice job. Thanks for squeezing me in. I just had one question really about promotions and just curious kind of what you're hearing as your customers think about 2021 around promotions at this point. Do you think things revert back to maybe a normal promotional type environment? Or do you think there's some incremental kind of investment or catch up investment that your customers might ask next year? Tim, it's the time of year where we're typically working through the promotional cadence for the subsequent year. And as we think about it right now and it's promotional cadence is driven by our retail partners. We don't necessarily drive that. We work with them and how our participation will play out. But our guess at this point is they're going to be thoughtful about it like they were this year. To the extent that the virus is more muted, I would and to your point, I would expect to see a more normal cadence of promotional activity to the extent that there's a more aggressive virus out there and they want to limit consumers going into their stores. They may pull back on that. So it's hard to determine right now exactly how it's going to play out for 2021, but we're going to work very closely with our channel partners to figure out how we can best best and most effectively participate in whatever promotions they decide to run. Okay. Okay, great. You're welcome. Nice to see you guys. Thanks. Okay. Operator, is there one more question? And ladies and gentlemen, our final question will come from the line of Phil Lin of Jefferies. Hey, guys. John, thanks for squeezing me in here. Just one really quick one. Good to see propane recover. When we look out to 2021, you got some pretty tough comps on the DIY side. So I'm just curious, do you have enough momentum on the pro side and Kichler or maybe we have this stronger growth across the board in DIY where you see Deco actually being up next year from a growth standpoint? Phil, Keith here. It's too early to call 'twenty one, as I said. We do expect growth in 'twenty one and we have a strong consumer. We have a strong brand. We have the best service. When you talk about our DIY paint, we have a great channel partner. So we would and we always do invest and drive our teams for growth and that's how we're thinking about it. Thanks a lot. Thank you, Erfel. Thanks, Michael. Thank you to everyone for participating in the call. I really appreciate it. Please stay safe and we will talk to you next quarter. Thank you. Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.